This learning content will familiarize you with the features and functionality of NSCC's Exchange Traded Fund (ETF) process.

Getting Started

About ETF covers the basics about NSCC's ETF service. ETF Processing explains the PCF creation/submission process. The ETF Portfolio Portal and ETF Historical sections provide detailed walkthroughs of tasks performed using the ETF Portfolio Service Web Interface. Log in to view Exchange Traded Fund (ETF) content in this Learning Center.

Exchange Traded Fund (ETF)An Exchange Traded Fund (ETF) is a portfolio of securities that trades on an exchange as an equity that seeks to replicate the performance of an index without the need to purchase the underlying components. The NSCC process for clearing ETFs includes the ability to review, either on-line or in a data file, the ETF’s portfolio constituents, thus automating the creation and redemption of ETF shares and their subsequent settlement. NSCC’s ETF processing service includes a web based tool displaying the ETF’s portfolio constituents and relevant cash amounts. ETF processing also includes a nightly distribution of domestic, foreign, and fixed income portfolio information.

Learn more about NSCC's ETF processing by expanding the About ETF sections below. Use the menu items at left to access training materials, video FAQs, ETF Portfolio Compostion File information, and ETF documentation.

To see most ETF learning content you need to log in to the Learning Center.

About ETF

NSCC's ETF process automates the creation and redemption of ETFs when the underlying securities are eligible to be cleared through NSCC. NSCC reports, clears and settles ETFs and their underlying securities through its creation/redemption process. NSCC’s ETF processing service includes a web based tool displaying the ETF’s portfolio constituents and relevant cash amounts. The browser based application data can be down loaded by Members as an excel spreadsheet. Members may also elect to receive a data file of the same portfolio information.

In the event the securities underlying an ETF are not NSCC-eligible, NSCC’s ETF processing service allows Members to customize standard portfolios by excluding those securities and substituting those securities with cash or with another NSCC eligible security. The customized portfolios can then be used to create and redeem the ETF within NSCC’s ETF processing.

NSCC also clears and settles U.S. listed ETFs that are traded in the domestic secondary market. In addition, ETF Agents and Authorized Participants have access to a self-service web based tool that enables them to monitor and maintain relationships in connection with these creation and redemption transactions.



This 19-minute video provides an overview of the DTCC ETF Portfolio Composition File and ETF Historical data products.

Are ETFs Regulated?

ETFs are regulated by the SEC and were granted exemptive relief under the following acts:

  • The Securities and Exchange Act of 1934
    • Enables broker/dealers and others to bid and offer shares in the secondary market.
  • The Investment Company Act of 1940
    • Enables shares to trade on an exchange at prices other than the net asset value (NAV).
    • Enables ETF shares to be redeemed at the NAV in creation units only.

 

How Many ETFs Exist?

At the time of this writing more than 1,500 U.S. listed ETFs and their components are distributed daily to more than 70 customers. More than 875 ETFs (62 percent of all ETFs) can be created and redeemed through NSCC. For a complete list of ETFs, go to:

http://www.dtcc.com/en/charts/exchange-traded-funds.aspx.

 

Does NSCC Process ETFs?

NSCC's ETF process automates the creation and redemption of ETF securities. NSCC reports, clears, and settles ETFs and their underlying securities through its creation/redemption process. ETF processing also includes a nightly distribution of domestic, foreign, and fixed income portfolio information.

All relevant ETF formats are available at: http://dtcc.com/clearing-services/equities-clearing-services/user-documentation/client-center-formats/file-formats.aspx.

 

Additional Notes:

  • NSCC allows participants to customize portfolios by excluding specific securities and replacing them with cash.
  • NSCC can support ETF processing when the underlying security is not eligible at NSCC (for ETFs that have been created and redeemed against cash, in lieu of securities).
  • NSCC also clears and settles ETFs traded in the domestic secondary market.

NSCC’s ETF process provides the following efficiencies and risk controls around the creation and redemption of ETFs:

  • Provides Members with the ability to select only the portfolios they need for next day’s trading through a web based on-line view. Through this mechanism, Members may down load the portfolio details to an excel spread sheet format. In addition, Members may continue to elect to receive a nightly data file containing the same information that is available through the web based tool.
  • Provides Members with the ability to submit a supplemental portfolio on trade date for standard and custom portfolios.
  • Provides an Instruction Detail file or report containing the details for each ETF’s creation and redemption.
  • Reduces manual deliveries.
  • Provides clearance and settlement of the ETF, as well as the underlying components, through NSCC's CNS and Non-CNS settlement processes. When eligible, settlement of the underlying components of ETFs and certain eligible ETFs through CNS are guaranteed by NSCC.
  • Allows Members to create or redeem ETFs on a shortened settlement cycle either on a next-day or two-day settling basis.
  • Allows Members to create or redeem a customized standard portfolio by substituting the underlying components with cash, or by replacing those components with other securities that are eligible to be processed at NSCC.
  • Allows Members to create or redeem a portfolio either against cash or through the exchange of securities.

On the day before Trade Date (T-1), Members can view the details of an ETF portfolio composition either through a web-based application or in a data file. The data file also identifies the cash amount in each portfolio and other relevant information.

On Trade Date (T), Members can place a creation/redemption order through the Distributor. The Distributor will deliver the order to the ETF Agent, who then transmits an Instruction File for the creates or redeems to NSCC.

On the night of T, NSCC will transmit an Instruction Detail File that displays the details of the creation and redemptions. The information in the file can also be viewed by Members who subscribe to Universal Trade Capture through that service’s data output.

Both the components underlying the ETF and the ETF itself are processed through NSCC’s normal equity clearance and settlement systems.

Creation and redemption transaction fees are reflected separately in Members’ end of day settlement.

Any full service NSCC Member that has entered into an Authorized Participant agreement with an ETF Agent and Distributor/Sponsor to become an Authorized Participant can use NSCC’s ETF processing service.

While, in some instances, an ETF sponsor may allow a non-clearing firm to become an Authorized Participant, any firm executing a transaction in an ETF through NSCC must either be an NSCC Member or must have a clearing relationship with an NSCC Member.

We've created a 3-minute video explaining the ETF Lifecycle.

 

The following tables depict the ETF timeline from T-1 through T+3 (Settlement Day):

T-1

Sequence

Role

Responsibility on T-1

1

Fund Manager/Issuer/Sponsor

The fund manager or the issuer sends a portfolio listing file (PLF) to the index receipt agent.

2

Index Receipt Agent (ETF Agent)

Sends NSCC a portfolio composition file for each ETF for the following trade day. The following protocols may be used:

  • File Transfer Protocol (FTP) via SMART dial-up or via the Internet
  • TCP2
  • NDM (Network Data Mover)
  • ArtMail
  • ArtNet

The portfolio composition file displays the individual securities and the weightings that make up one ETF basket for the following trade day. For most ETFs one basket equals 50,000 shares.

The portfolio composition file also includes cash amounts in the fund for each basket unit, such as accrued and balancing amount.

The index receipt agent sends a portfolio composition report/file listing the securities in each ETF to authorized participants. The file also contains the estimated cash amount in each portfolio. Transactions eligible for cash creates and redeems show a cash creation amount on the portfolio composition file.

 

T toT+1

Sequence

Role

Responsibility on T to T+1

1

Authorized Participant

Places a creation/redemption order through the distributor.

2

Distributor

Sends the creation/redemption order to the index receipt agent and a confirmation to the fund manager or issuer.

3

Index Receipt Agent (ETF Agent)

After receiving the order from the distributor, the index receipt agent sends NSCC ETF creation instructions on behalf of its authorized participant.

The following protocols may be used:

  • File Transfer Protocol (FTP) via SMART dial-up or via the Internet
  • TCP2
  • NDM (Network Data Mover)
  • ArtMail
  • ArtNet

You can also download print image versions via the DTCC Portal GUI.

4

NSCC

On the night of T, NSCC sends an instruction detail file showing the details of the creates and redeems to participants with activity. The report serves as the contract for the creation/redemption activity.

NSCC assigns the closing price on T to each of the components to determine their contract value.

NSCC then totals the contract values of all of the components and assigns that amount as the contract value.

There is also a cash amount that pertains to accumulated dividends, fund fees, and any balancing amount that is applied to the value of the ETF's contractual value. The cash amount is reflected in the consolidated settlement system.  The cash amount also contains a transaction fee that is collected on behalf of the agent but is not guaranteed by NSCC.

Note: Starting in 2012, the cash amount will contain the transaction fee only.

 

T + 2

Role

Responsibility on T + 2

NSCC

NSCC distributes Consolidated Trade Summary Reports.

NSCC distributes CNS Projection Report.

NSCC distributes Non-CNS Consolidated Trade Summary Report for ineligible securities.

 

T + 3 (Settlement Day)

Sequence

Role

Responsibility on T + 3

1

Authorized Participant

Delivers the underlying components to CNS.

2

NSCC

CNS delivers underlying components to the index receipt agent.

3

Index Receipt Agent (ETF Agent)

Delivers the 50,000 ETF shares to CNS.

4

NSCC

CNS delivers the ETF to the authorized participants. Deliveries are made through DTC book entry with CNS.

To contact DTCC's customer service center: 1-888-382-2721.

For international calls: +1-212-855-8099. 

Question Type Select Option
ETF application testing and assistance 6-7-3
ETF Production assistance 6-7-1
File delivery issue 5-1
Password reset assistance 1-3



The table below provides details about the types of ETFs in existence as of this writing.

ETF Type

Notes

Index

Most common type.

Attempts to replicate the performance of a market index, for example, the S&P 500.

Daily leveraged or inverse ETFs.

Use replication, representative sampling, aggressive sampling.

Commodity

Invests in commodities (precious metals, futures).

Not regulated as investment companies under ICA of 1940, but subject to CFTC regulation.

Public offering subject to SEC review, and no-action letter needed.

Most popular are gold and silver.

Fixed Income

Invest in U.S. government, corporate, or municipal bonds (for example, iShares Barclays 20+ year treasury bond fund).

Currency

Rydex Investments launched first fund in 2005 known as "Currency Shares."

"Actively Managed"

First launched in 2008 by Power Shares.

Facts About Exchange Traded Funds (ETF)

  • An ETF trades on an exchange as an equity
  • NSCC’s ETF process automates the creation and redemption of ETF securities
  • NSCC reports, clears and settles ETFs and its underlining securities through its creation/redemption process
  • ETF processing also includes a nightly distribution of domestic, foreign and fixed income portfolio information
  • Participants can customize portfolios by excluding specific securities substituting them with their cash value
  • ETFs can also be created/redeemed against cash (in lieu of securities) when the underlying securities are not NSCC or DTC eligible. For example, Leveraged and Commodity based ETFs that contain futures and swap contracts
  • NSCC also clears and settles ETF’s trades in the domestic secondary market

Benefits

  • Provides a nightly Portfolio Composition File of each ETF and a Web browser GUI that pertains to the ETF for the following trading day
  • Provides an instruction detail file containing the details for each create and redeem
  • Reduces manual deliveries
  • Provides clearance and settlement of the ETF, as well as the underlying components, through NSCC’s CNS and Non-CNS settlement process and any relevant cash amounts. The underlying components, the ETF and the cash amounts (minus the transaction fee) are guaranteed by NSCC
  • User can create or redeem an ETF on a T+3, T+2 or T+1 (next day) basis
  • Can create or redeem a customized portfolio with cash in lieu of securities
  • Can create or redeem a portfolio against cash or through the exchange of securities

ETF Flow (How the Service Works)

  • On T- 1, participants receive a Portfolio Composition report/file listing the securities in each ETF. The file also contains the estimated cash amount in each portfolio. Trades eligible for cash creates and redeems show a cash creation amount on the portfolio composition file
  • On Trade Date (T) a participant places a creation/redemption order through the distributor. After receiving the order from the distributor, the agent bank transmits an instruction file for the creates or redeems to NSCC
  • On the night of T, NSCC sends an Instruction Detail File showing the details of the creates and redeems to participants with activity. This report serves as the contract for the create/redeem activity
  • Both the components and the ETF are processed through DTCC’s normal equity clearance and settlement systems
  • Cash amounts for the transaction fees are sent directly to money settlement and are settled under a unique NSCC settlement codes. For standard portfolio’s it is a code 54; for custom portfolio’s it is a code 55

 Facts About Continuous Net Settlement (CNS)

  • CNS is an accounting and balancing system
  • Each day NSCC identifies trades that were matched through its trade capture and reporting system and stages them for settlement
  • System generates reports of security, money positions and related information
  • CNS provides clearance for equities, corporate bonds, UIT’s and municipal bonds that are eligible at DTC

Benefits

  • CNS nets participants security obligations on a daily basis to one net long or short position for each CUSIP
  • NSCC becomes the contra side of each netted obligation and guarantees its settlement
  • Each day CNS settles one net position per issue with each contra party - NSCC

How the Service Works

  • T-1
    • On the evening of T-1 the ETF agent bank (sometimes referred to as an Index Receipt Agent) sends NSCC a portfolio composition file for each ETF for the following trade day
    • The portfolio composition file displays the individual securities and the weightings that make up one ETF basket for the following trade day. For many ETFs one basket equals 50,000 shares
    • The portfolio composition file also includes cash amounts in the fund for each basket unit
      • Example
        50,000 ETF shares = 10 IBM shares
                                        40 MRK shares
                                        30 CSCO shares
                                        ...etc.
                                        And cash amount
    • NSCC distributes the portfolio composition files on T-1 to members, non-members and the listing exchanges
  • T
    • On Trade Date the agent bank’s authorized participant instructs the distributor and or the agent bank they want to create (or redeem) an ETF basket
    • The agent bank sends NSCC the ETF creation instructions on behalf of the authorized participant
    • On the night of T, NSCC generates the following transactions (for a redemption it is reversed) for the agent bank and its authorized participant for settlement on T+3
    • Agent Bank: - 50,000 ETF shares (deliver - short) + Components (receive - long)
    • Authorized Participant: + 50,000 ETF shares (receive - long) - Components (deliver - short)
    • NSCC assigns the closing price on T to each of the components to determine their contract value
    • NSCC then totals the contract values of all of the components along with the cash amount provided by the ETF agent, which pertains to accrued dividends and fund fees and assigns that amount to the contractual value for the 50,000 ETF shares. If all securities settle on settlement date the only money that settles through CNS (code 82) is the cash amount
    • The transaction fee is sent directly to money settlement and collected through a unique money settlement code on T+3. For standard portfolio’s it is a code 54; for custom standard portfolio’s it is a code 55
  • T+1
    • On T+1 NSCC reports the details of creates/redeems that were received
    • Once the create/redeem for an eligible security is reported to NSCC, the transaction is eligible for processing through CNS
    • The status and movements of these securities are reported through various reports
    • Cash amounts for dividends and fees are sent directly to money settlement and are collected through a unique money settlement code on T+3
  • T+3
    • On T+3 the authorized participant delivers the underlying components to CNS who, in turn, delivers them to the agent bank
    • The agent bank delivers the 50,000 ETF shares to CNS who, in turn, delivers them to the authorized participants. These deliveries are made through DTC book entry with CNS
    • When all securities settle there is no CNS ‘mark to market’ payment. The only money changing hands is the cash payment for the transaction fee and the difference between the value of the components and the cash amount and the ETF which is sent directly to money settlement. If not all securities settle, CNS will mark to the market the securities that are failing based upon the primary markets closing price for the components and the ETF
    • CNS automatic delivery process occurs in two cycles: the night and the day cycle
    • Daily money settlement is based on the value of all settled trades plus or minus mark-to-the-market calculations for all open CNS positions and relevant cash amounts
    • For any trades that are not completed on settlement day, CNS will mark the open position to the market and the open position will then become part of the next business days netting/settling process

Additional Services Information

  • Exemptions which are negative instructions sent to NSCC to indicate short positions that should not be automatically taken from participants DTC account. Separate exemptions exist for one day settling items
  • Priorities which are standing instructions set by participants to NSCC to control the delivery of securities of CNS long positions to their DTC accounts. ETF agents are High-High priority for the CNS night cycle and CNS day cycle allocations
  • Processing Reorganizations
    • Reorganizations – both mandatory and voluntary are processed at NSCC. The typical corporate action on ETFs is a regular or reverse stock split. A new CUSIP is usually assigned to the ETF but the trading symbol does not change. Components can also undergo a corporate action such as a regular or reverse split, cash dividend, spin-off or liquidation.
    • Information about these events is available through a series of reports and notices that show activity under way in various CNS subaccounts
    • NSCC allows protection on voluntaries when a participant has a long (failing) position with CNS
  • Processing Dividends
    • Accounting of dividends is based primarily on a participants closing position on the record date
    • Cash and Stock dividends, spinoffs and other type of distributions are reported to the participant on the morning after record date
    • On payable date the appropriate debit or credit is applied to the participants CNS Sub account
  • Processing Buy-Ins
    • Issue an intent buy-in to CNS once a security has failed
    • CNS retransmits the buy-in to the participant or those that owe shares to CNS

For information about products and services related to Exchange Traded Funds, visit the Universal Trade Capture (UTC) section of this Learning Center.


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In addition to the frequently asked questions answered below, you may also wish to review the many video ETF FAQs available. To do so, perform a search for "ETF FAQ" and check the Videos tab. In the ETF Documentation section, you may also download pdf ETF FAQs & Expanded ETF File Format Definitions (125 KB) .

ETF FAQ


Additional file details are available in documents available on dtcc.com – follow the link below and click on "ETF" (you may need to scroll down) to reveal/access them.

http://dtcc.com/clearing-services/equities-clearing-services/user-documentation/client-center-formats/file-formats.aspx

Yes. Here and in the ETF Documentation section we provide both a specification document and a text file showing canned test output of the new Enhanced File Layout – 02261256 via the following links:

  pdf 02261256 Enhanced Consolidated Portfolio Composition Output File Layout (211 KB)

  document Single Consolidated PCF Test Data (819 KB)

The ETF agent may submit either the ISIN or SEDOL number. In most instances ETF agents will provide both. If one of the values is not submitted for a component we generate a zero for that component. If the component does not have a registered ISIN or SEDOL number the agent and product sponsor may provide a “dummy” value. NSCC only validates components that are registered as a U.S. security and contains a valid ISIN. Except for that, NSCC does not validate the ISIN or SEDOL number and cannot guarantee its accuracy.

Occasionally, there are ETF portfolios that have components that are experiencing a corporate action and in order to process the portfolio we must derive a user ticker symbol and CUSIP. These user tickers may include ZZZZ’s or XXXX’s at the end of the symbol or contain numerics.

All the cash amounts are submitted to NSCC by the ETF Agents and NSCC redistributes the information to its subscribers. We cannot validate the Issuer, Sponsor or the Agents calculation. However, Key Definitions beyond what is available in our file formats is included in this document. Should you need additional information as to a particular calculation please contact the ETF Agent or Issuer for that particular ETF.

The Portfolio Composition File (PCF) contains the ETF Trading Symbol.

For more information regarding NSCC’s ETF process, please contact Relationship Management at 800-422-0582 or the Customer Support Center Hotline at 888-382-2721.

When NSCC does not receive a component based PCF from the Index Receipt Agent, we use the previous day's PCF and zero out the fund values. All the porfolio header records are zero. The only portfolio header records that are not zero are the CUSIP number and number of components. For Domestic portfolios, this alerts subscribers that the previous business days file will be used should any creation or redemptions occur for the particular ETF.

This is a decision made by the product sponsor and the ETF Agent. Generally, if the basket components are ineligible to clear through DTC they will be noted as an "F" in the Foreign and Domestic Field in the Portfolio Composition File. In the case of ETFs that contain corporate, municipal, mortgage-backed and U.S. Government fixed income securities, they will be almost always on the Portfolio Composition File.

When a new ETF is added to the PCF file you will see a new Portfolio Header (Type 2) that introduces the portfolio. There may be instances where a sponsor and ETF agent provide the portfolio before it has begun trading. When new components are added to an ETF's portfolio in the PCF file, the Component Record (Type 3) New Security Indicator field will contain an "N."

No - PCFs are distributed the night before trade date (or T-1) and apply to tomorrow’s portfolio.

Virtually every U.S. listed ETF’s portfolio are on the files including the converted HOLDRs product to an ETF structure. Exchange Traded Notes and ETFs that are backed by physical commodities, such as GLD and SLV are unavailable because there isn’t a port folio to distribute.

You may receive files in two ways, either through pulling the data (get) or by DTCC pushing the data to you. Available protocols include:

  • File Transfer Protocol (FTP) “get” of the data via broadband through the Internet.
  • TCPI = FTP push via the Internet (encrypted)
  • TCP = FTP push via DTCC SMART Circuit
  • NDM (Network Data Mover) over DTCC SMART Circuit

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